Forest Oil Corporation (ticker: FST) is engaged in the acquisition, exploration, development, and production of natural gas and liquids in the United States and selected international locations. Forest’s estimated proved reserves and producing properties are located in the United States in Arkansas, Louisiana, Oklahoma, Texas, Utah, and Wyoming.
The company today provided an update on its Eagle Ford Shale drilling program for 2013 and 2014 and announced a teleconference call scheduled for April 12, 2013 at 7:00 AM Mountain Time to discuss the release.
Highlights:
- Accelerated Development Program to Hold an Aggregate of 55,000 Gross (27,500 Net) Acres
- Incorporate Four Drilling Rigs by the Third Quarter of 2013 and Drill 60 Gross (30 Net) Wells in 2013 and 80 Gross (40 Net) Wells in 2014
- Eagle Ford Shale Average Net Sales Volumes Expected to Reach 6,500 Boe/d in 2014 from 1,600 Boe/d in 2012
Forest recently announced the signing of a definitive agreement with an industry partner for the future development of the Company’s Eagle Ford Shale acreage position. Under the terms of the agreement, the industry partner will pay a $90 million drilling carry in the form of future drilling and completion services and related development capital in order to earn a 50% working interest in Forest’s Eagle Ford Shale acreage position. In conjunction with the agreement, Forest plans to accelerate development by increasing drilling activity to four rigs, from one to two rigs currently, by the end of the third quarter of 2013. Forest projects that the capital carry amount combined with the accelerated pace of development will bring forward approximately $250 million in PV10 economics.
Forest anticipates that the accelerated development program will hold an aggregate of 55,000 gross (27,500 net) acres in Gonzales County, compared to 40,000 gross (40,000 net) acres based on the current development program. The increased acreage position has 688 gross (344 net) locations identified based on 80-acre spacing, and Forest anticipates being able to drill 80 gross (40 net) wells per year beginning in 2014. Based on Forest’s current estimated ultimate recovery of 300 Mboe per location, the Eagle Ford acreage contains a potential gross unrisked resource of over 200 MMboe (100 MMboe net).
Forest estimates that its share of capital expenditures in the accelerated development plan for 2013 and 2014 will total approximately $125 million and $220 million, respectively. The accelerated development plan will result in ten and twenty additional net wells being drilled in 2013 and 2014, respectively. The 2013 additional net wells are primarily scheduled to be on-line later in the year and thus will not materially change Forest’s average net sales volumes for 2013. However, average net sales volumes from the Eagle Ford are expected to more than double from an average of 2,800 boe/d in 2013 to 6,500 boe/d during 2014 as the benefits from a full year of the accelerated development program are realized. Importantly, the Eagle Ford program is anticipated to generate lease level income of approximately 68% and 80% of the total net capital expenditures for 2013 and 2014.
The table below summarizes and highlights the primary benefits of the accelerated development plan as compared to Forest’s current development plan.
| 2013 | 2014 | |||||||||||
| Current | Accelerated | Current | Accelerated | |||||||||
| Development Plan | Development Plan | Development Plan | Development Plan | |||||||||
| Acreage Held (Gross) | 40,000 | 55,000 | 40,000 | 55,000 | ||||||||
| Acreage Held (Net) | 40,000 | 27,500 | 40,000 | 27,500 | ||||||||
| Drilling Rigs (Average) | 1 | 3 | 1 | 4 | ||||||||
| Wells (Gross) | 20 | 60 | 20 | 80 | ||||||||
| Wells (Net) | 20 | 30 | 20 | 40 | ||||||||
| Net Production (Boe/d) | ~2,800 | ~2,800 | ~3,700 | ~6,500 | ||||||||
| Net Capital(1) ($MM) | $125 | $125 | $125 | $220 | ||||||||
| Lease Level Income(2) ($MM) | $85 | $85 | $100 | $175 | ||||||||
| Lease Level Income as a Percentage of Capital | 68% | 80% | ||||||||||
(1) Net of $90 million drilling carry in the accelerated development plan
(2) Lease level income based on NYMEX strip prices as of March 31, 2013
CONFERENCE CALL AND WEBCAST
You can hear the repeat of the webcast conference call here.
You can read the conference call transcript here.
RESEARCH COMMENTARY
Oil & Gas 360® compiled a few paragraphs from research analysts who wrote on Forest and Schlumberger following the announcement. OAG360 suggests that you contact the analyst and/or salesperson to receive a complete copy of the report. Please read the important disclosures at the end of this note.
*Wells Fargo Securities (4.12.13)
Summary: Positive—Eagle Ford Development With Schlumberger (SLB) Expands Development Plan And Generates PV10 Value. We view the deal as positive, as it accelerates production and brings forward PV-10 value. FST gives up only 12,500 acres but essentially no reserves or existing production, but brings in the door $90MM. Besides the straight deal metrics, from our perspective, also important that the new management team continues to execute and deliver on the strategic plan. On a multiple basis, the additional 2014 EBITDA less additional capex means our 2014 EV/EBITDA multiple moves from 5.3x to 4.6x. Given the amount of shorts and recent pressure on shares, we would expect outperformance today (4/12; although there is a loud vocal short who will likely try to take it the other way).
Deal Metrics. SLB is to provide a $90MM drilling carry through drilling and completion services in exchanges for a 50% working interest (WI) in FST’s Eagle Ford position. Thereafter, FST and SLB would each cover 50% of future capex. This agreement applies to wells spud prior on or after November 28, 2012, and not placed on production by April 1, 2013. Currently FST expects that the carry will be exhausted by Q4 2014. With this agreement, FST’s Eagle Ford development plan will now consist of 55,000 gross/27,500 net acres, versus 40,000 gross/40,000 net prior. Maybe a little small amount of production to transfer with the wells completed between the dates mentioned above, but essentially receiving in $90MM for 12,500 net acres, or $7,200 per acre.
*Howard Weil (4.12.13)
Forest Oil $5.02 (SP): Announces Eagle Ford JV & Accelerated Drilling Program
Quick Take: Forest announced that the Company has entered into a Joint Venture agreement with Schlumberger in its Eagle Ford acreage. Under terms of the agreement, SLB will pay $90 million in the form of a drilling carry to earn a 50% working interest in the acreage. The agreement applies only to wells spud on or subsequent to November 28, 2012, none of which had been placed on production prior to April 1, 2013. FST does retain all of its interest in wells and production that were spud prior to November 28, 2012. FST estimates that the transaction will allow the Company to hold an aggregate of 55,000 gross acres (27,500 net) in Gonzales County compared to 40,000 gross (40,000 net) acres based on the current development plan. FST and SLB will accelerate drilling activity in the play by increasing the rig count from one to two rigs currently to four rigs by the end of 3Q13. The accelerated capital plan should result in 10 additional net wells being drilled in 2013 and 20 additional wells in 2014. However, the incremental wells are not expected to impact 2013 production materially given that the wells are not expected to be turned into sales until late in the year. In 2014, net sales volumes from the Eagle Ford are expected to more than double from 2,800 Boe/d in 2013 to ~6,500 Boe/d in 2014.
*Baird Equity Research (4.12.13)
FST announces Eagle Ford agreement with SLB; focus on accelerating value — positive. This morning Forest Oil (FST) announced an agreement with Schlumberger (SLB) to develop its Eagle Ford acreage in Gonzales County, which we view favorably given this transaction helps alleviate a capital constraint and allows Forest to accelerate value of its acreage ($250MM in PV10 accelerated according to the company). Essentially Schlumberger will pay $90MM in drilling carry in the form of future services and other development capital to earn 50% interest in Forest acreage. The partnership will increase the rig count to four rigs by 4Q13 vs. the 1-2 rig development plan prior, therefore drilling 10 and 20 more wells respectively in 2013 and 2014 and maintaining 55,000 gross acres (27,500 net to FST) vs. 40,000 previously. Minimal production impact on 2013 though 2014 Eagle Ford production now expected to double Y/Y.
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